Categories
Cryptocurrency

The Bitcoin Bubble – Explained

First of all – let me make it clear – Bitcoin is good money. What I mean by that is that it can be used for purchases, it is a store of value that can’t be diluted by the creation of more bitcoin, and it can be used over both time and space- meaning that you can have it today and spend it tomorrow and you can send it across the world and in both cases it will still have value. What value? From what I can tell – the value of Bitcoin appears to be right around $6500 USD.

The chart above is looking at bitcoin over the past year. The range is normally about $5k-$7k  but last November-December – suddenly things took off. There has been a lot of analysis, a lot of speculation as to why and how, and a lot of bullshit written about the bitcoin bubble of 2017. I’d like to clear that up. First, what is the definition of a bubble:

Speculative Bubble. A situation in which prices for securities, especially stocks, rise far above their actual value. This trend continues until investors realize just how far prices have risen, usually, but not always, resulting in a sharp decline. Speculative bubbles usually occur when investors, for any number of reasons, believe that demand for the stocks will continue to rise or that the stocks will become profitable in a short time. Both of these scenarios result in increased prices.

A famous example of a bubble is the dot-com bubble of the 1990s. Dot-com companies were hugely popular investments at the time, with IPOs of hundreds of dollars per share, even if a company had never produced a profit and in some cases, had never earned any revenue. This came from the theory that Internet companies needed to expand their customer bases as much as possible and thus corner the largest possible market share, even if this meant massive losses. NASDAQ, on which many dot-coms traded, rose to record highs. This continued until 2000, when the bubble burst and NASDAQ quickly lost more than half of its value. Other famous examples include the tulip mania of the 1630s and the housing bubble in the early 2000s.

Often, people misunderstand bubbles to mean that the underlying assetts do not have value. They do…but that value is inflated at a rapid pace which creates more demand which inflates the bubble further which creates an intense ‘fear of missing out’ aka FOMO which inflates the bubble even further – and then the bubble bursts and the value of the underlying assett plummetts, often going far below the actual value. It happened with housing, beanie babies, tulips, and bitcoin.

What usually destroys a bubble assett is that supply grows with the price until supply outsrips demand. Take beanie babies and tulips for example- eventually there were more of them than buyers and so the prices had to be reduced which led to panic selling and fortunes being wiped out (Dutch fortunes and Granny fortunes). This didn’t happen with Bitcoin. It actually couldn’t happen because the number of Bitcoin can never be increased – and yet, when you look at the chart above – there was an obvious inflation and crash – so what happened.

First the facts 1)There were a large number of bitcoin that were taken ‘off the market’ after the hacking of the Mt. Gox Exchange. Many were stolen and the rest were put on ice with the trustee, Kobayashi. 850,000 bitcoin were stolen with 200k bitcoin recovered and put in trust. 2) Bitcoin was making a steady rise through 2017 which started gathering media attention in October of 2017 3) Many bitcoin that had been ‘off the market’ whether through fraud or not paying attention suddenly were woke and brought back to the market.

Now, this is where it gets interesting. You can’t create more bitcoin – but you can create similar assetts which could be thrown into the same class with bitcoin and thus profit from the FOMO that was growing around bitcoin. There had already been quite a few invented – Ethereum, Litecoin, Digibyte, Skycoin, and even a ‘fork’ of bitcoin called ‘Bitcoin Cash’. Along with these older surviving projects were hundreds of failed projects and when the bitcoin mania started bleeding into the mainstream – thousands more were to come to the forefront. This is where the real scam is.

THe real function of an assett bubble is to take good money from investors and give them soon to be worthless junk in return. Every bubble has transferred real wealth from the fortune-dreaming rubes who arrived late to the party to the savvy hucksters who figured out how to trade gold for garbage. That’s exactly what happened with the bitcoin bubble.

All of the rubes (and I’m one of them) took real money (bitcoin) and turned it into fake money (ERC-20 tokens, ICOs without tokens, exit schemes, and ponzi schemes like BitConnect). Bitcoin was always in a class by itself – yes, there is value in Ethereum, Litecoin, Digibyte and other coins and tokens – but it doesn’t have the same intrinsic value or cachet of bitcoin.

Everyone wanted to get rich from Cryptokitties or from Tron or from EOS and IOTA – and here is where the bubble comes in – to buy those other cryptocurrencies, you needed to start with bitcoin. It was a scammers dream. Create money from thin air and require real money to buy your air money. In this case, the real money was fiat currency which was then converted to bitcoin (also real money) and then to trade bitcoin for air-money and finally turn the bitcoin back to fiat while it was inflated. I don’t know if the whole thing was planned and orchestrated or not – but if it was, it was brilliant. A sort of mastermind usage of the same principles which Oliver North used to trade money for cocaine and then get the money back selling surplus weapons to the cocaine dealers.

To summarize: 1) bitcoin was rising to it’s actual value and making bitcoin holders rich 2)There were not enough bitcoin to create a FOMO panic and so ‘new’ cryptocurrencies were created and absorbed the money pouring into the space 3)Bitcoin prices soared as a result of bitcoin being how to buy in 4)Early buyers of bitcoin and long time bitcoin holders like the trustee Kobayashi brought their bitcoin to the market and began to sell at the all time highs 4) bitcoin prices crashed as a result 5)investors began to use Ethereum and Bitcoin Cash to buy into new projects hoping to strike it rich 6)the cycle repeated with the ‘alternative cryptocurrencies’ aka ‘alts’7)Bitcoin gradually returned to stasis value 8)Ethereum returned to stasis value 9) Alts returned to stasis value 10)Latecomers to the party lost as much as 90% 11) Massive wealth was transferred from the FOMO party to the creators of the mostly worthless coins and tokens of 2017/2018.

Conclusions:Does this mean that Bitcoin will always be in the $6500 range? No. As more users begin to hold and use bitcoin the price will rise. Also, every four years the rewards for bitcoin mining are cut in half (aka ‘the halving’). This combination of increased usage and decreased new supply means that bitcoin will become more scarce and more valuable. It’s my opinion that $6500 is the range that bitcoin will remain in unless there are significant increases in desirability and usage until 2020 when the next halving occurs.

Are Ethereum and Litecoin worthless? I don’t think so. My estimate of stasis for each is quite a bit higher than they currently sell for. A good range right now for Ethereum is $600-$800 per token and for Litecoin $200-$250. There are valid use-cases for both which give them an inherent value. As for other tokens and coins – there are too many to go into but I will give my thoughts on a few. I don’t think Bitcoin Cash has a future. Tron and Neo could both take off if the Chinese government gives them approval and consent. Cardano, Stellar, and Ripple all offer intriguing opportunities for a change in the way that banking is done but probably won’t yield significant results for years. Monero and ZCash might get some traction in black market and money laundering but don’t offer a real value to ‘honest’ traders or investors. EOS has some potential as a replacement for Ethereum, but unless Ethereum is revealed to have huge flaws – won’t overcome the first to market advantage. Finally, Digibyte. Digibyte seems to be everything that Bitcoin wanted to be but without the bubble. I believe that Digibyte is a superior cryptocurrency, but it might be a Betamax to bitcoins VHS.

The bottom line is that bitcoin is the gold standard.

Categories
Cryptocurrency

Bitcoin, Ethereum, Litecoin and Altcoins – What Are They? How can you buy and sell them?

I’ve made it no secret – I think the banking and financial systems of every country on the planet are corrupt and need to be replaced. The problem, of course, is that whatever you replace them with has the potential to also be corrupt as long as you are relying on trust. This is why I love Bitcoin and cryptocurrency. Trust is not an issue – or at least it shouldn’t be.

From the moment that Satoshi Nakamoto released his bitcoin white paper on the internet, Bitcoin has existed without the need for trust. Satoshi,  the almost (or perhaps completely) mythical creator and father of bitcoin – concieved of Bitcoiin in the wake of the 2008 financial crisis when financial institutions had once again clearly shown that the entire financial system was completely untrustworthy.

Bitcoin was born during the last economic crisis when someone (or a group of someones) saw the need for a break from trusting government and financial institutions to take care of the needs of people. Blockchain (the technology bitcoin is built on) works like this – a group of unrelated individuals (miners) use complex math to encode (crypto) multiple transactions into a permanent ledger which cannot be changed or altered and is not owned or operated by any individual entities. Blockchain is built to eliminate the need for trust. For example in regular finance: I write a check to you. You take the check to the bank. The bank takes my money and puts it in your account. We have to trust each other and we have to trust the bank – the middle man, the intermediary. Blockchain takes the bank out of the picture and makes our transaction a permanent part of the record. There is no need for trust – it is trustless. It eliminates the need for banks as well. Bitcoin is the currency built on top of that chain of transaction blocks (get it? Blocks of transactions in a chain where each transaction is necessary to validate every other transaction – a blockchain).

Ethereum (ETH) is a newer blockchain based computing platform developed by Vitalik Buterin which allowed for scripting on the network (i.e. computing and building applications aka smart contracts).

Litecoin (LTC) is a cryptocurrency started by Charlie Lee. It was a sort of clone of bitcoin with some improvements to make it faster and cheaper to conduct transactions. Lee said it was silver to bitcoin’s gold.

At this point, you now know as much or more about bitcoin and cryptocurrency than 90% of the population. It’s very early in the game. As of writing this, there are nearly 2000 additonal cryptocurrencies. Many (most actually)of them are built on the Ethereum protocol and are called ERC-20 compliant – which means if you have an ethereum wallet – you can use those tokens with it. Some well known examples are Golem, 0x, Basic Attention Token, and Ziliqa. Each of them has their own use cases and eventually will have their own blockchains.

And that is the key, each of these projects eventually has a blockchain of their own. Some well known examples of other coins with their own blockchains are Ripple, Digibyte, EOS, Stellar, Cardano, Bitcoin Cash, Tron, and Neo. To be clear, both Litecoin and Ethereum area also coins. Coins have their own blockchain, tokens use the blockchain of another project. So there are coins on the Stellar, Neo, and Tron networks – as well as on Ethereum.

Bitcoin is the one and only first blockchain project. It has a founder but no hierarchy, no controlling body, and no central authority. The Bitcoin Foundation manages governance – but, as the case with Bitcoin Cash (and Litecoin among others) when there is a schism between the nodes – it is possible to ‘fork’ and thus create a new coin with new rules. Bitcoin Cash was born of such a disagreement among miners. The Bitcoin Cash people claim that they are more closely aligned with the original vision of the Bitcoin white paper. The Bitcoin (aka Bitcoin Core) miners say that Bitcoin Cash is a centralized monster that distorts the vision of Satoshi Nakamoto.

Within all the coins above, there are privacy coins, function coins, and exchange coins. Privacy coins like Monero and Dash are built to hide the identity of the user – something which bitcoin is known for but actually doesn’t do. Function coins allow you to use the coin for a specific funtion – a good example is Docademic (an ERC-20 token) which allows you to purchase online medical advising for tokens. Exchange coins such as Binance Coin (also ERC-20 token) allows you to purchase token and pay fees with your tokens.

Coinbase, the largest exchange has not issued their own coin – yet – maybe they never will. Binance is the main exchange for most alt-coins.  A third place you can buy and sell crypto is the phone based stock trading app RobinHood. The difference between the three is that coinbase is the most highly regulated and probably the most hackproof – you can buy only Bitcoin, Litecoin, Ethereum and Bitcoin Cash on Coinbase at the moment, though Ethereum Classic (a fork of Ethereum) will be coming soon and Coinbase has announced that they are exploring adding Cardano, Stellar, 0x, Zcash, and Basic Attention Token sometime in the coming months. You can buy for fiat currency, sell for fiat currency and send/recieve to and from other wallets at Coinbase.

Binance does not have fiat currency enabled and has many many more coins and tokens. The catch is, you have to fund your Binance account with cryptocurrency from elsewhere and if you want to change for currency, you need to go to Coinbase or another fiat enabled exchange. Robinhood allows you to buy and sell a basket of cryptos but you cannot transfer to or from and you do not control the private keys of your wallets – thus – it eliminates what many consider to be the most important feature of cryptocurrency – trustlessness.